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PART II. THE FEDERAL POWER TO TAX
Section 1. Constitutional Sources of Federal Taxing Power 1
Congress is given the power to tax under Article I, Section 8, clause 1 of the United States Constitution:
The Congress shall have Power to lay and collect Taxes,
The general taxing power under Article I, Section 8, clause 1 is limited in several respects:
All Duties, Imposts and Excises shall be uniform throughout the United States. (Article I, Section 8, clause
No Tax or Duty shall be laid on Articles exported from any State. (Article I, Section 9, clause 5)
No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken. (Article I, Section 9, clause 4)
The uniformity required of excise taxes and other indirect taxes is a geographical limitation. That is, the subject matter must be taxed at the same rate wherever found, and the limit does not bar progressive rates and nongeographic classifications. La Belle Ironworks v. United States, 256 U.S. 377 (1921); Knowlton v. Moore, 178 U.S. 41 (1900); Head Money Cases, 112 U.S. 580 (1884).
B. PROPERTY TAXES
A tax on real or personal property is a direct tax. Accordingly, to survive constitutional scrutiny under Article I, Section 9, such a tax must be apportioned among the several States in accordance with the census. Currently, the Federal Government levies no property tax. However, in the past, Congress has exercised its authority to levy an apportioned tax on real property. In 1813, Congress enacted a direct tax on property totalling $3 million, which the statute apportioned among the 18 States; within each State, the statute apportioned among the counties or parishes of that State. For example, $369,018.44 was apportioned to Virginia, and $6,354.50 of that amount apportioned to Fairfax County. (Act of August 2, 1813,
1The discussion of constitutional sources of the Federal Government's power to tax is adapted from "Federal Tax Power," CRS Report, Thomas B. Ripy, November 22, 1983. Those interested in the topic might also consult "Federal Taxation of Income, Estates, and Gifts," Boris I. Bittker, Warren Gorham and Lamont (New York, 1981), and "Basic Federal Income Taxation," Third Edition, William D. Andrews, Little Brown & Co. (Boston, 1985).
2 Stat. 53.) In 1861, Congress again enacted a direct tax on property. (Act of August 5, 1861, Section 87, 12 Stat. 295.) This measure raised a total of $20 million and was apportioned among the States, territories, and the District of Columbia.
C. INCOME TAXES
In 1895, the Supreme Court held that the individual income tax levied on income from property was a direct tax on property. Accordingly, the Court held that the income tax was impermissible under the Constitution unless apportioned uniformly as required by Article I, Section 9. (Pollock v. Farmers Loan and Trust Co., 157 U.S. 429, aff'd 158 U.S. 601.)
The practical effect of Pollock was to bar enactment of an individual income tax until the passage of the 16th amendment to the Constitution. The constitutional bar, of course, could have been circumvented either by restricting the income tax to earned income, or by apportioning the tax among the States according to population. The first course was politically infeasible; the second administratively impractical.
In February 1913, the 16th amendment to the Constitution was approved, providing:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The Revenue Act of 1913, enacted after the effective date of the 16th amendment, provided an individual income tax which was upheld against a number of constitutional challenges in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916).
D. OTHER TAXES
Today, while the most significant source of Federal revenue is the individual income tax, Congress has used its taxing authority to raise revenue from a wide variety of other sources as well. Sources of Federal revenue include individual and corporate income taxes, taxes on the transfers of wealth (gift and estate taxes), payroll taxes on employment and self-employment income, and various excise taxes (including taxes on the production or sale of gasoline, alcohol, tobacco, telephone services, and many other articles). Tables 1 and 2 of Part V, "Historical Tables," show levels of the revenue raised from each major source of Federal taxation. A listing of current Federal excise taxes and rates is included in section 5 of Part IV.
Generally, the Supreme Court has interpreted Congress' power to tax under Article I, Section 8 as a broad one. The Court has described this power as "exhaustive," and embracing "every conceivable power of taxation." (Brushaber, supra.) Specifically, the Court has upheld the power of Congress to tax a broad variety of activities, including transfers of wealth at death (Knowlton v. Moore, 178 U.S. 41 (1900)), transfers by gift (Bromley v. McCugh, 280 U.S. 124 (1929), the use of property (Hylton v. United States, 3 Dall. (U.S. 171 (1976), production of sugar with the tax measured by gross re
ceipts (Spreckels Sugar Refining Co. v. McClain, 192 U.S. 397 (1904)) and a tax on the production of mines, measured by gross receipts (Stanton v. Baltic Mining, 240 U.S. 103 (1916)).
E. CONSTRAINTS OF FEDERALISM
Under Article 1, Section 9, Congress may not tax the exports from any States. In addition to this express constraint, the courts have found in the principles of federalism an implied doctrine of State immunity from Federal taxation. In its earliest form, this doctrine was applied broadly and was invoked to exclude from Federal taxation such items as the salaries of State officials (Collector v. Day, 11 Wall. (78 U.S. 113 (1871)). More recent decisions, however, have narrowed the scope of the doctrine so that it applies only to Federal taxes that directly effect a traditional State governmental activity or function. (Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939), Ohio v. Helvering, 292 U.S. 360 (1934), South Carolina v. United States, 199 U.S. 437 (1905).)
A recent State challenge to the Federal taxing power was brought by South Carolina (joined by the National Governors' Association), against a provision in the Tax Equity and Fiscal Responsibility Act of 1982, under which a Federal tax exemption is not available for interest earned on State and local government bonds unless the bonds are issued in registered form (as opposed to bearer form). South Carolina challenged the provision as a violation of the Tenth Amendment to the United States Constitution and the doctrine of intergovernmental tax immunity. In South Carolina v. Baker, 108 S. Ct. 1355 (1988), the Supreme Court held that the registration requirement did not violate the Tenth Amendment or the Constitutional principles of federalism.
Retroactive changes in the tax law have on occasion been challenged as an unconstitutional deprivation of property without due process of law in violation of the due process clause of the fifth amendment. It is well settled that tax law changes that are retroactive within the same year of enactment do not violate constitutional guarantees of due process. See Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916). The courts have also generally rejected due process challenges to tax law changes that are retroactive to prior years where taxpayers might have reasonably expected the retroactive change. See, e.g., Sidney v. Commissioner, 273 F.2d 928 (2d Cir. 1960).
There have been a few cases in the transfer tax areas (gift, estate and inheritance), where the Court has found that retroactive legislation violated due process. See, for example, Nichols v. Coolidge, 274 U.S. 531 (1927), holding that the estate tax imposed on transfers prior to the act's enactment was unconstitutional. See also Untermeyer v. Anderson, 276 U.S. 440 (1928), holding that a gift tax imposed on gifts made prior to the act was unconstitutional. Some authorities have suggested that the distinction between those statutes which have been upheld and those rejected lies in the notice. given the taxpayer as to potential changes in the tax law. If the taxpayer was or should have been aware of the possible modifica